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Add a Lump of Yanzhou Coal to Your Portfolio

Despite a large run-up, Yanzhou is still a bargain.

Talk about making a bad call. Back in August 2006, I wrote an article telling investors to stay away from Yanzhou Coal Mining (NYSE: YZC). Since that time, as the only U.S.-listed Chinese coal company, it has advanced steadily and is up more than 150% since my shortsighted recommendation. Ouch.

Well, I'm making a U-turn now and urging investors to consider taking a position in this high-margin coal play. Simply put, shares of Yanzhou are likely to put in another strong performance in 2008 because:

Coal prices are only going up.

The company boasts some of the highest margins in the industry.

The shares continue to carry an attractive valuation.

Let's take a fast look at these three factors.

Rising coal pricesA reliable benchmark for gauging the direction of coal prices is the annual contract talks between Australian miners and Japanese utilities. According to a recent JPMorgan (NYSE: JPM) report, the contract price of 2008 thermal coal is expected to rise to $90 per ton, up 62% over last year's price of $55.65 per ton, because of supply constraints and surging demand in both China and India.

Its mines are close to its customers. The customers pay less for transportation, so they're willing to pay more for the coal.

The coal produced at its six main mines in Shandong is high-grade, low-sulfur coal, which fetches a premium in the marketplace.

These mines boast significant, easy-to-excavate deposits.

ValuationDespite the impressive move over the past year or so, shares of Yanzhou remain attractively valued. At a recent price of $91.47 per share, Yanzhou trades at around 15 times consensus fiscal 2008 estimates of $6.07, a projected 29% increase in earnings this year. Considering that lower-margin players such as Peabody and Arch trade at similar forward estimates, I'd consider Yanzhou to be quite undervalued.

All in all, I'd suggest that investors take a serious look at adding shares of Yanzhou Coal Mining to their investment collection. It could turn into a diamond by next Valentine's Day.